In 2019, when it was still called Facebook, Meta explored issuing a cryptocurrency named ‘libra’ after the basic Roman measure of weight.

A Meta-led, Swiss-based consortium of reputable companies including MasterCard International was to issue the virtual currency and manage its blockchain. Each libra was to be backed by safe securities denominated in state-issued currencies. The aim was to make libra’s value more stable than unbacked cryptos such as bitcoin. Libra, however, never eventuated.

But such tokens could exist soon. Household-name companies such as Amazon and Walmart are investigating whether to issue stablecoins, the buzziest part of the crypto world that is dominated by Tether Holdings through its namesake.

Stablecoins have stable pricing because they are pegged to the price of other assets, mostly the US dollar but sometimes commodities such as gold and occasionally other cryptos. Algorithms and trading arbitrage underpin a few.

Issuers maintain pegs by promising to buy back tokens at an agreed rate. They use the proceeds of token sales to buy assets, especially US Treasuries, for that purpose and to earn revenue. Over the past decade, stablecoins, which are mainly used to trade unbacked cryptos, have soared to a market worth estimated at US$250 billion.

While six years ago the prospect of a privately issued digital currency provoked resistance, even calls to ban such money, US lawmakers, many of whom accept donations from the crypto industry, are encouraging stablecoins.

President Donald Trump in January demanded a regulatory framework for digital assets to make the US ‘the crypto capital of the planet’. The result is the Genius Act, an acronym for Guiding and Establishing National Innovation for US Stablecoins. The Senate passed the act in mid-June and it could soon be law.

If so, the US-dollar stablecoin sphere would boom, and with it would escalate the risk that stablecoins could destabilise the financial world.

US-dollar stablecoins, once unleashed, are likely to flourish because their mass use would revolutionise finance. Money will gush from public to private control because the biggest companies have billions of users who are likely to use their tokens. Virtual currencies issued by platforms such as Facebook could introduce financial services and credible currencies to emerging countries lacking them.

As money transfers within a private network could be almost costless, instantaneous and secure, digital currencies would disrupt the payments, settlement and money-transfer systems run by payments companies, banks and central banks.

Banks, for their part, are considering issuing (co-)branded stablecoins to create another revenue stream. The White House has macro motives for promoting stablecoins, as well as commercial interests – a Trump-affiliated stablecoin already boasts a market value of US$2 billion.

Treasury Secretary Scott Bessent says US-dollar stablecoins could grow into a US$2 trillion-plus market where issuers would need to buy short-term US Treasuries to back their tokens. That, in theory, would lower short-term US yields and support the US dollar and cement its reserve status.

Others, however, point to the risks stemming from a form of digital finance that dates to 2014 when BitUSD became the first stablecoin.

Critics worry about letting powerful companies, especially platforms, gain more influence over society. They fret about privacy and criminal use. Above all, they worry that a private takeover of money will erode official control over the money supply, limit the effectiveness of monetary policy and threaten banking systems.

For all their newness, private stablecoins come with the same threat that private banks have posed since fractional-reserve banking was devised in the 17th century. This is the risk of bank runs.

Critics say the Genius Act will spur so many private stablecoins it would return the US to the Free Banking Era of the 19th century when banks could issue fully backed paper currency that was redeemable for gold and silver on demand. The era when the US government only issued coins is renowned for a plethora of private paper notes and, more pointedly, for lethal bank runs when depositors thought banks lacked enough reserves to redeem their notes. The era is infamous too for ‘wildcat banks’ that existed only to defraud people.

The risk with stablecoins is holders might doubt an issuer has enough quality, liquid assets in reserve. The danger is that issuers have an incentive to buy assets that offer the highest returns, not those that are safe and easy to sell quickly. Any inkling of trouble and holders, whose deposits are not covered by government guarantees, could panic.

Even US Treasuries can lose value – higher yields, due to say a surge in inflation, mean lower prices. In 2023, Silicon Valley Bank nearly collapsed after bond losses triggered a bank run that, via social media, ignited contagion. If a run on stablecoins occurred, issuers might dump Treasuries to meet redemptions. That could destabilise global bond markets.

Stablecoins have already failed to hold their pegs but they were too small to cause systemic disruption. BitUSD in 2018 lost its parity with the US dollar in 2018 and is yet to reclaim it. The algorithmic stablecoin TerraUSD in 2022 dived more than 50 per cent below its peg when the Luna crypto in the peg mechanism plunged 83 per cent within hours.

At 31 March, Tether had US$149 billion of assets, including nearly US$120 billion in US Treasuries, to support US$144 billion worth of issued tokens. Looks secure. But the company based in El Salvador is not independently audited and the collapse in 2023 of Switzerland’s Credit Suisse shows no financial institution is ever safe.

Another critical concern is stablecoins could weaken demand for longer-term Treasuries, and thus bolster yields on commercial and mortgage debt. Another threat is stablecoins offering interest (which are now banned) might suck enough deposits from banks to destabilise them.

No matter. The technology exists. Vested interests are mobilised. Companies are excited. The Trump family will profit. The global monetary order will be reordered if US-dollar stablecoins go mainstream. These tokens will enhance the global financial system until they don’t.

It’s unknown if the masses will take to crypto with the enthusiasm shown by criminals and speculators. Maybe not. Stablecoin risks are reduced if only big companies have popular tokens. But giants can implode and the likely mass uptake from countless stablecoins magnifies risks. China, which wants to protect its official digital money, has banned private stablecoins. Other jurisdictions see the threat and might too.

Not the US. Hopefully the risks of stablecoins will be contained. Otherwise savers might regret these tokens didn’t remain a vision, like Meta’s libra.